MR. ZETTELMEYER: Welcome all. Thank you so much for coming. This is a Book Forum on an extremely topical issue, the interaction of economics and politics in Latin America. That has always been hot and important, but it is particularly hot and in the news today. If you have seen the recent cover of "The Economist," it is entitled "The Battle for Latin America's Soul." We have had similar headlines in other major publications.

Jeromin Zettelmeyer

The sense of the book Javier is going to talk about is that perhaps things are not quite as dramatic as that, at least as far as the economic policy arena is concerned.

To discuss the topic, we have an extremely distinguished set of speakers here. We are going to have opening remarks by Agustín Carstens, who needs very little introduction. He is Deputy Managing Director of the IMF, and he has been in that position since August 2003. He was previously Deputy Secretary of Finance in Mexico, and prior to that, Executive Director for one of the three big Latin American constituencies at the IMF. So he knows Latin America in and out. He also has had a very distinguished career as a research economist mainly at the Banco de Mexico where he was Director General for Economic Research. He holds advanced degrees from the University of Chicago, and a bachelor's from ITAM in Mexico. Without further ado, if you could please open the forum, thanks very much.

MR. CARSTENS: Good afternoon, all of you. Thank you very much for coming to this book presentation, and a particular welcome to those of you who are from outside the institution.

Agustin Carstens

It is a real pleasure from me to offer some remarks at this event. As a Latin American economist, I always find it very encouraging when distinguished scholars try to figure out the challenges and opportunities in the region. On this occasion, Javier Santiso offers us a very interesting book where he puts together his professional expertise with his experience from having worked for some time in a financial institution and dealing in real life with issues in Latin America. I think that as a result he tackles very well the intermingling of issues -- it is very difficult to divorce political from economic issues.

The economic challenges that Latin America faces are well known. The region needs higher and more sustained growth than it has experienced in recent decades, and growth needs to be more inclusive. It needs to bring about greater reductions in poverty and inequality than have happened in the past.

Javier offers hope that some changes may be underway that would help the region meet these challenges. He notes that we may be witnessing in much of Latin America the emergence of the `politics or pragmatism'. I like this phrase very much. I think it is a very fortunate phase. It refers to a politics that, and here I am quoting from the book, "is more concerned with effective outcomes than with conceptual purity."

The real challenge is: how do you get it going, how can you really bring about the political consensus to make this `politics of pragmatism' really work out. But I think this is a very close description of what is going on and more of such politics would be quite fruitful in the region.

Growth in the past has suffered from policy reversals. Economic policies in the region have too often swung between extremes driven by the political whims of the party or person in power. It would be a welcome development if policies are chosen on the basis of evidence of what has worked. This ensures broad continuity in policies and sets a basis for sustained growth. To me, the clearest evidence of such a shift in attitudes is in the conduct of macroeconomic policies, particularly monetary policies.

In 1990, average inflation in Latin America reached 1,200 percent. Argentina, Brazil, and Peru, three of the region's largest economies, posted four-digit rates of inflation, and no country managed to achieve inflation below 10 percent.

As the standard of living of the population suffered, with the poor hurt the most, governments in the region undertook far-reaching changes. Central banks were given more autonomy in return for greater accountability. This autonomy has helped decouple monetary policy making for electoral calendars. There are also strict limitations, indeed, sometimes even prohibitions, on the central bank's financing of fiscal deficits.

Central bank reform has in most countries been accompanied by a change of monetary policy regimes. Javier reminds us of the saying that in Latin America, `a president who devalues is a president devalued'. The odds of such an outcome have gone down over the past decade, as many countries have migrated from exchange rate pegs to flexible exchange regimes, and many countries in the region have introduced inflation targeting.

These institutional reforms of monetary policy have helped deliver an impressive decline in inflation in Latin America. Today, inflation has been brought down to single-digit territory in most countries. As Javier points out, during the 1990s, no Latin America government was able to continue in power once annual inflation exceeded 15 percent.

What is important is that the commitment to low inflation is no longer viewed as an agenda of one particular political party or an imposition by an outside party. Instead, it is a policy goal on which there is a deepening domestic consensus. The liberation of monetary policy from the domain of politics is an important development. It has contributed to the maintenance of macroeconomic stability through the many political transitions that have taken place in Latin America in recent years.

Javier calls the spread of pragmatism in Latin America a silent revolution. It is also in my view an unfinished revolution. Let me mention a couple of reasons.

First, within the realm of macroeconomic policies, the progress on the monetary front needs to be complemented by progress on fiscal and financial sector policies. While fiscal positions in the region show overall strength at the present time, this partly reflects favorable global conditions. To make lasting gains, there has to be strengthening of fiscal frameworks, just as monetary policy frameworks have been strengthened over the past decade. Too much spending continues to be directed to inefficient programs, and too little to the kinds of public infrastructure spending that will boost growth or to social programs that will lower inequality. In Javier's apt analogy with the distance past, "building an ever greater pyramid to cover the earlier pyramids" -- as the Aztec emperors used to do -- is in no one's long-term interest, least of all the poor.

Fiscal policy rules and fiscal responsibility legislation, as has been adopted in Chile, Brazil, Colombia, and Peru, can help to build a social consensus for responsible policies. By removing some rigidities, such rules and legislation can make tax-and-spending systems more progressive and supportive of the poor. Of course, the form of fiscal policy rules varies considerably across countries. Such variation is inevitable, and, in fact, welcome. What works in one country may not necessarily work in another.

Reforms are also needed in the financial sector. Julio Maria Sanguinetti, the former Uruguayan President, once said that, "The banking system will never take you to paradise, but it can bury you in hell in an afternoon."

In a short period, a banking crisis can undo many of the gains achieved through prudent macroeconomic management over many years. As in the monetary sphere, granting supervisory and regulatory authorities adequate independence can be crucial in getting them to make a real commitment to financial sector stability. Many of the policy decisions that lead to banking crises were not made out of a lack of technical skills or ignorance of the true state of affairs. Rather, they were the outcome of a political process that too often placed the near-term interests of specific groups over financial sector stability and longer-term growth.

The way I look at it, the progress in monetary stability and in central bank independence is the expression of a political consensus and a political will that inflation was no longer tolerable on the continent. I think the same type of political consensus or political will needs to be expressed in the case of banking crisis and banking instability.

I think that from a technical point of view, providing more institutional strength in the financial system by granting the appropriate independence and legal autonomy to the supervisory regulatory bodies is easier to achieve than strengthening fiscal institutions. Fiscal institutions are far more difficult to strengthen. Certainly, it is very difficult to ask a politician or a president to give up or delegate some political power that has to do with taxing, or even more so, with spending.

But I think it is far more achievable to ask a president and to try to look for consensus in a country, in particular, in Latin America, to grant more autonomy and more independence to the financial sector's supervisory bodies. And it would be a true social expression that banking crises and financial crises are something that society does not want to have any longer. In the same way as people in society expressed their will that they were fed up with inflation in the region, I think it would be appropriate for them to make the political expression that they are sick and tired of having banking crises.

If you really look into the development of their debt to GDP ratio on the past 20 years, an important contributor to this ratio has been the recurrence of the banking crises. So I think that there is a very clear example in the way the region managed to uproot inflation -- the same type of political process should be applied to strengthening the infrastructure and independence of financial sector institutions.

The type of analysis that Javier conducts in trying to bring together political ideas and economic thinking is extremely valuable. I think that the balance that needs to be struck between the two is essential in the case of Latin America. We only can hope that the electoral processes underway will help forge a social and political consensus on economic policies. And as I said, just as in the case of monetary policies, broad continuity in other economic policies would help the region attain the high sustained and inclusive growth it seeks.

So it is a big challenge that the region faces, but the region has had important successes in some areas, successes that can help design the path forward in other areas, and in that way, make progress towards what I would call the unfinished policy reform in Latin America.

I thank very much Javier for being here with us. I would want to congratulate him on his very clear and illuminating book. Thank you.

MR. ZETTELMEYER: Thank you very much, Agustín. Let me now introduce the remainder of the panel. Here's the book: I am supposed to hold it up at least long enough that the photographer can catch it. It is not just a great book, it has a beautiful cover. It is one of the most nicely presented books I have seen in recent times, so congratulations to MIT Press.

Javier Santiso and Jeromin Zettelmeyer

Javier is one of these people who are lucky because they move among all sorts of interesting worlds. He is a thinker and an academic on the one hand. On the other, he is now a policy maker of sorts, I would say. And he has a financial markets background, too. The best of all is, his academic roots are in political science, even though he is a economist, too. So he really has a unique perspective to talk about the set of the issues we are addressing today.

Right now he is the Chief Development Economist at the OECD Development Center. And you have been doing that for about a year?

MR. SANTISO: For the last 6 months.

MR. ZETTELMEYER: Six months. Before that he was the Chief Economist for Latin America and Emerging Markets at Banco Bilbao Vizcaya Argentaria, and he held a variety of academic positions before that. He is also the author of four books, including a book on the political economics of emerging markets, specifically in Latin America, which is in some sense an intellectual precursor of the book we are discussing today, and is also very good reading.

Then we have Pablo Bachelet here on my left, one of the truly distinguished journalists in Washington covering Latin America. He is right now Latin America Correspondent in the Washington Bureau of the Miami Herald, and he has been covering Latin America both in the region and outside it for a long time, including for Reuters and America Economia in Chile and Argentina. He is also the author of a well-received biography of Gustavo Cisneros.

We have Charles Collyns, the Deputy Director of the Western Hemisphere Department here at the Fund. Charles I would say is a classic IMF economist of the best sort. There is also the other sort ...

(Laughter)

MR. ZETTELMEYER: Charles has worked at the IMF since the early-1980s. He worked, as a relatively junior economist, on Latin America: I think he was Desk Officer for Argentina. And then he left the Western Hemisphere Department, but returned to it about 2 years ago as the IMF's Mission Chief for Brazil. He has played a real intellectual leadership role in the Department and has edited a bunch of recent publications of the department on the current economic problems in Latin America.

Next, Moisés Naim. Moisés, I struggle a bit over how to describe you in a nutshell. It may sound too grand: He is one of the great Latin American intellectuals of our time. Do you like that?

(Laughter.)

MR. ZETTELMEYER: He is the editor and publisher of Foreign Policy magazine. He was also an important policy maker in Latin America; he was Venezuela's Minister of Industry and Trade in the early 1990s. Before that he was an academic, also in Venezuela, and at some point an Executive Director at the World Bank, I think in the 1980s.

And finally we have Alvaro Vargas Llosa, another very distinguished writer on Latin America who is Director of the Center on Global Prosperity at the Independent Institute here in Washington. He is the author of a number of books on Latin America, including "Liberty for Latin America," which received the Sir Antony Fisher Memorial Award, and was named by The Washington Post as one of the best books of 2005. So it is the second book, after Santiso's, that you want to get after leaving this room.

(Laughter.)

We are going to proceed by giving the author of the book the floor, so, Javier, you have about 15 or 20 minutes.

MR. SANTISO: Good morning. I am very lucky to have a lot of friends around the table here in the panel for the discussion.

First of all, I would like to thank Agustín Carstens for the invitation, and Prakash Loungani who put together this forum. Agustín asked me how long it took to write the book. In fact, writing is not the major problem; the major problem are the ideas that you can put in it. So, in fact, writing the book was a matter of a couple of months or a year maybe, even doing a job like being in a bank like BBVA. But also it is a lot of discussions and exchanges with a lot of people, my colleagues at BBVA, my students at Johns Hopkins and CSIS, and some of them are here today. So I want also to extend my thanks to my former colleagues at BBVA and my former students.

I want also to thank Olivier Blanchard. The manuscript at the beginning, as my accent is betraying, was in French. So Olivier was one of the first readers, and he said the manuscript should exist in English, so I want to thank him. I want to thank also Andres Velasco who did the tremendous Foreword, despite, as you know, being a little busy over the last months before joining the new government in Chile.

Thanks also to a person who was very important for the IMF and was also one of the first readers of the book, Jacques De Larosiere. I know that you have a lot of respect for him. Thanks also to Ricardo Hausmann. And last but not least, I would like to thank someone to whom the book is dedicated, Albert Hirschman. I studied with him, and I think we deserve to revisit those kinds of authors even if they are now, let's say, `old authors'.

Now I am even more out of time, so my mission is like in the movie with Tom Cruise: "Mission: Impossible." I have more than 30 slides that just sit there, and I am not Tom Cruise. So I will try to do my best to explain at least the bulk of the ideas in the book, and maybe leave much more time for the discussion in which I will be very interested.

The book starts with a description of a wonderful triptych by Bosch. It is now 500 years that we have been celebrating this triptych. It was finished at the beginning of the 16th century. There is an interesting point about the triptych: it is the first iconographic representation of an element of the New World into a painting of the Old World. We do not see it perfectly, but the right of the triptych shows Paradise. There is a tree which is in Spain is called a drago. In fact, it is a tree from the Canary Islands, but for El Bosco, Hieronymus Bosch, it was also the representation of this New World that was just discovered.

So what is interesting is that from the very beginning, we start with misunderstandings, the first misunderstanding by Columbus, but then also of El Bosco, who thought that this New World obviously was located in Paradise.

The search for this utopia has been part of the story of what became Latin America. At the beginning we were searching for utopia, for Eldorado in space. Obviously, it turned out to be a failure. So then we thought if utopia is not possible in space, maybe it is possible in the other dimension, the temporal dimension, in time. So the location of utopia is in the future.

We could make an interpretation that this search of Paradise, of the utopia of the future, is part of the story of Latin American political economy, and all the paradigms that have been developed, and the revolutions in the twenty centuries, are part of this search. Structuralism, monetarism, Marxism, liberalism -- this is part of the search, and it is a huge waltz of paradigms that the continent has been dancing.

There was the Mexican Revolution, the Cuban Revolution, the Chilean Revolution in 1973, and also the Sandinista Revolution. The use of the term of revolution is very interesting because it was used not only for, let us say, Marxist-inspired changes, but also for what we call `the neoliberal revolution'.

Let me just develop this a little bit because it may be the heart of the thesis. For me, the breakthrough in the silent transformation -- as Augustin said, it is an unfinished journey -- was what was going on in Chile. In Chile, as you know, there have been a lot of revolutions: Revolucion en Libertad in the 1960s which was structuralist inspired, then Revolucion Socialista in 1970 which was Marxist inspired, so, again, a new paradigm. In 1973 we armed a new paradigm which was Revolucion Neo-Liberal, neoliberal revolution.

For me there is not, let us say, a systemic break in 1973. There is a continuity. What we did in 1973 with the Neoliberal Revolution is simply to change the liquid that you put into the glass. The metrics, the glass, stayed the same. That is, it was what I call `the political economy of the impossible'. That is the assumption that with a huge paradigm, with a huge model, we will be able to change the social reality. And even more: if the social and political and economic reality does not fit with the paradigm, it is not the paradigm that you change, it is the social and political economy that you try to adapt.

From this point of view, the big change is not 1973 or 1974. The big change, the silent transformation, that is maybe less spectacular than having a good revolutionary man coming out, is in 1982. As you know, there was this big debt crisis that was going on in all of Latin America. Chile suffered tremendously from that debt crisis. There was a new generation of policy makers that were much more pragmatic that came into power at the time at the beginning of the 1980s. Instead of applying the textbooks, they adapted. They tried imaginative solutions to the huge threats that the economy was facing. For example, they did the unbelievable, which was not which written in the Chicago textbooks: they nationalized all the banking systems.

What happens in 1990 is even more spectacular, because you have a democratic transition, you have a political regime change which is a major shift, obviously. And so the temptation is great to say: `there was an original sin because of all of these reforms were implemented under the autocracy, the dictatorship of Augusto Pinochet'. So we will put everything at zero and we will start with a new paradigm, with a new model, and forget about the past. No incrementalism, no gradualism, no `continuism'.

But the Chilean democrats did not do that at all. Instead, they adapted the reforms. They pursued an imaginative combination, where at the same time that you pursue the liberalization process -- for example, you pursue the free trade agreements with all the countries around the world -- you also maintain, for example, part of the Chilean copper under state control. So you have the combination of both [markets and state].

They liberalized the current account and the capital account. But at the same time, they put what they called in 1991 Encaje, which is a capital control system. In the pension reforms -- and I will come back to these reforms -- obviously you had a privatization or transfer from public to private, so this looks like very textbook-driven. But at the same time you have the regulation of the system. So you have privatization and regulation.

So if there is any lesson coming from Chile it is: forget about the models, forget about the paradigms, and maybe avoid the straight jacket that will put you into corners. They did it in a very pragmatic way with `continuism' and gradualism. This is the bulk of the thesis.

There are two kinds of strategies of development that may be combined. One is the Chilean way where you invent endogenous masts, endogenous anchors, and they have been doing that for three decades now, the Chileans. Another option is that you try to be fixed with an exogenous anchor. This is the Mexican strategy, and maybe the Mexican strategy -- which is obviously combined with endogenous institutional anchors -- maybe it is an exception in the area because not everybody is as lucky as the Mexicans to be near the U.S. For the other countries, the hard way is, let us say, to only rely on endogenous anchoring. We've seen the anchoring process in the region for many, many years now.

Let me move on to what is going on in the region in recent years. What we are witnessing now is a recovery in Latin America. Over the last few years what has been amazing is that you have synchronized growth in all countries, which is quite unusual -- not only high growth, but also synchronized growth.

When you try to seek explanations, the major one is to say that the external stars, the global stars, have lined up well for Latin America, so it is a big matter of luck. There are very low interest rates around the world. A financial expansion has been pumping a lot of liquidity to the emerging markets, Latin America included. So this is an external factor that has been very important.

The other is growth around the world, in the U.S. and in the other areas. Maybe the most interesting development here is what is happening in Asia with the China growth. In Latin America -- and in Europe -- we've tended maybe not to pay too much attention to this trend. But for the first time, Latin America can rely on not only one or two engines of external growth but on three.

Traditionally the engine was trade with the U.S.; this was until let us say the 1980s. In the 1990s there was a new engine of growth that was external and that was driven by Europeans with a lot of FDI that was pulled into the area. So those were two pillars, two supports, for Latin America.

And now we have a third one which is linked with what is happening in Asia and basically in China. This obviously is positive news for Latin America, but the flip side of that is that you are also dependent on what is going on in China.

The other explanation [for the recovery in Latin America] is the tremendous commodity boom that we are experiencing. Latin American countries have been surfing the wave of the commodity boom -- oil, copper, et cetera -- and this is very important for nearly all the countries in the region. So one can say that it looks like all these Latin American stories is only a matter of luck, external factors that are driving these good shapes for the region.

But in fact, as Augustin insisted, we have an anchoring process that has been tremendously spectacular. [You see it in] average inflation. What is impressive -- and this is not a trend specific to Latin America --- is this anchoring, this monetary mast that is developing in the region. It is not only that since the mid-1990s you have lower and lower inflation, but year after year the anchoring that is being pursued. You have even countries that experienced the luxury of having an inflation differential in their favor compared to the U.S. Last year it was in the case of Mexico, which was obviously an historic event.

The other anchoring to which we should also pay attention is the fiscal anchor. Perhaps it is not strong in all countries, and we can come back to the important fiscal issues that were already mentioned by Augustin. But if take the example of Chile, you see a tremendous fiscal surplus, an historical fiscal surplus for a country like Chile, and Mexico it is an equilibrium. So you have anchoring processes that are really, really important also from the fiscal side.

And the third external anchor, the third transformation, is the external anchor. Quite simply, the trade openness of the region is increasing in a dramatic way since the beginning of the 1990s.

So what is happening in Latin America is not only a matter of luck, there are also these endogenous transformations. I try to develop that in the Chilean chapter of the book, and in the Brazilian and Mexican chapters.

Some flashes on specific countries. First, on Chile -- and I will not have time to develop everything but this is very impressive and it is just illustrate what I tried to say at the beginning -- you have the evolution of the pension system in Latin America, the assets under management in the system relative to GDP. Obviously, you have countries other than Chile that adopted this reform. But look, what is interesting is what happened in [1982], the year of the transition. Again, the usual thing would have been to say that this [reform] has big original sin, it is pension reform generated and developed under the dictatorship, et cetera. If we had the old style of political economy that was prevailing in the 1960s and the 1970s, that would simply have put everything again at zero ground, no continuism, no gradualism, and we would start from scratch again, which was the business as usual that we were seeing in the region.

Javier Santiso

Instead what happened was that the assets under management [of the pension system] shot up after the year of the transition. This is absolutely what I call the silent transformation, this gradualism and continuism, avoiding a new model, but pursuing [the old]. Obviously, the reforms are incomplete, are unfinished, they are fragile. They adapted the reforms, they tried to improve them during the 1990s, and there are still improvements pending. But my point is to say simply these are the trends of what was happening after the return to democracy. Again, we are talking about a major political regime change, and at the same time you have this continuism and gradualism in the political economy of Chile. And we can say the same with the arrival of Michelle Bachelet, you will have no shift of policy in Chile. Again, it is a trend of three decades that we are seeing that.

Our friends at the Inter-American Development Bank released a wonderful report last year that was on the politics of policies. They tried to measure a policy stability index. Guess what? The [best] performer is Chile, and the countries that came after that, Brazil and Colombia, are exactly the ones that I tried to illustrate in the thesis. So this is a very impressive transformation.

On Mexico -- and I am running out of time so on Mexico I will not insist too much -- but just to show it an example the external anchoring. This was a tremendous transformation, one of the most spectacular in emerging markets. Simply you have the classic rent economy at the beginning of the 1980s that diversified in a tremendous way its exports. This external anchoring again was a gradual process in Mexico, starting even before the NAFTA, but NAFTA obviously helped the transformation.

Brazil: here also you have an external anchoring, and we could illustrate also with the fiscal anchoring that was spectacular under the Cardozo years. And we saw it pursued by Lula to the surprise of all the financial markets that were not believing that it would be the case. The trade openness in the case of Brazil is interesting because it is not only that Brazilian firms and corporations are exporting more outside, but also that now they are looking to the outside world in a more dynamic way by investing in other emerging countries in Latin America, in Africa, and even in Europe and the U.S. So it is not only a mercantilist way of looking at the outside world.

Just to conclude and to invite a discussion -- we are obviously witnessing a tremendous political cycle in Latin America. Nearly all the countries are voting and have presidential elections. We started with Bolivia and Chile in December and January, and Bolivia and Chile give the flavor of the menu of options that is available. I insist very much on the `political economy of the possible'. Obviously there is the other tendency which one could call `the political economy of the impossible' or whatever. But the menu of options is very, very large, and during the year you will have choices that will be made by nearly all the big countries in the area.

What is interesting is what already happened in some countries from the point of view of the political cycle. First, you have countries that were able to decouple the political cycle from the economic cycle. The spectacular one was Mexico. Mexico had recurrent crises with tremendous regularity. Every 6 years there was a crisis, and every 6 years Wall Street and the City were surprised because there was a crisis, but this was recurrent and regular. What they achieved in the year 2000 is precisely a decoupling because for the first time in the history of Mexico, there was a transition year with the opposition managing to get the power. So you have this decoupling process in Mexico; Chile is an example, and there are other examples in the area.

Probably what we will see this year is the decoupling process in Brazil. And Brazil is precisely an illustration of the thesis: whoever wins, Alckmin or Lula, will not change a lot in terms of the continuism or gradualism that I tried to explain. If there are no external shocks, there will be a decoupling in the case of Brazil.

This was not the case in 2002. When Lula jumped in the polls what happened is that the differential of the spreads between Brazil and the rest of Latin America moved up, so really there was a fear of this good revolutionary man who was jumping into power. It happened that the good revolutionary man was not a good revolutionary man; it was a much more pragmatic government that came into power pursuing and trying to combine fiscal and monetary orthodoxy with social policies.

There is a big question for Latin America, and to say that is like saying again the same old story. Take, for example, Peru. In Peru you had 5 percent of GDP growth on average under Toledo. They ended last year with 6.7 percent of growth -- a kind of Asian growth pattern. The problem is that Peruvians do not see the benefits of all that growth. All the numbers in Peru are amazing when you look at the fiscal balance, with inflation under control, et cetera. So there is a big problem: Peruvians at least do not see that this growth is improving their quality of life, improving the quality of health, education, the infrastructure of their cities. That is why you have the temptation to go back to this political economy of the impossible, to listen to the sirens of Humala Ollanta in this case. So we have to take very seriously these two questions: first, what social pact we want for Latin America, and above all, what Latin American countries want for themselves -- and this is not fixed, the social pacts. And, second, what fiscal pacts do we want to sustain this social pact, and this is a pending issue for also for the quality of policy-making process in Latin America.

Thank you very much.

(Applause)

MODERATOR: Thank you so much, Javier. That was great. Now we will proceed in alphabetical order: Pablo Bachelet, Charles Collyns, Moises Naim, and finally Alvaro Vargas Llosa. Pablo, please.

MR. BACHELET: Thank you very much. What I am going to do is basically provide a little bit of political context to what has been happening in Latin America. I will be very brief, 5 minutes.

Pablo Bachelet

What I do as a Latin America correspondent is to mostly cover U.S. policy towards Latin America. I think until recently obviously that has been a big story -- that is, a big story for us at The Miami Herald. But I think what has been happening very recently is that you have some very significant events that are affecting relations between nations in Latin America, and we actually have the U.S. playing kind of the interested bystander in this relationship. So I am going to elaborate a little bit on that; and if you have questions on U.S. policy or anything else, I will pick it up in the question-and-answer session. I think also this will bring more elements into the debate on Javier Santiso's very interesting book.

What were the big stories for journalists until maybe a month or 2 months ago? There were crises in countries -- I mean Bolivia, Ecuador, Haiti. That was a big story for us, the instability in countries, especially in some Andean countries. The second issue, obviously, was the U.S. confrontation with Venezuela. It is still ongoing, it is not a resolved issue, obviously, and you can pick anything you want of the hat and say it is getting worse -- last week you had the decertification on terrorism collaboration, the human trafficking report, Chavez's verbal abuse of President Bush.

Another big issue was this wave of elections coming in sweeping Latin America where it seemed that one left-wing leader after another was winning. And then Latin America itself seemed to be kind of on some kind of a track towards unity in trade policy. They were announcing a couple of years ago the creation of the South American Community, and so on and so forth.

I think after May 1 all that has very much changed in very important ways after the Bolivian announcement that it would nationalize its oil and gas fields. What you are seeing now is more bickering within the countries themselves. I believe you are all familiar with what happened. Bolivia nationalized and that impacted very directly counties like Spain, but especially Brazil, the biggest foreign investor in the energy field in Bolivia, and you saw President Lula in Brazil really defensive on this issue. He was being attacked very strongly as being too weak in protecting Brazil's interests and not foreseeing what was coming. Then he and his foreign minister started speaking out in strong terms. Brazil had always taken a very sort of diplomatic approach to its relations with its neighbors, but you saw them really even threatening at one point to pull out their ambassador. Moisés probably has a longer memory, but I cannot remember Brazil ever threatening to do that to another Latin American country.

You have countries like Peru, Mexico, and Nicaragua that are all undergoing elections, so this is something important in the mix, but they are complaining that Chavez is interfering in their internal electoral processes. And Peru and Mexico do not have ambassadors in Caracas now, and Venezuela has also pulled its ambassadors from those countries.

You have the Mercosur Trade Pact in some sort of crisis. I think it is a double crisis. You have Uruguay threatening to pull out, saying that the Mercosur Trade Pact does not do enough to really help smaller countries, and you have Uruguay in a very strong confrontation with Argentina over the pulp mill investment and the environment challenge that involves. Then you have Chavez wanting to join the pact, so that is causing a lot of strains within Mercosur.

Then you have Venezuela pulling out of two trade pacts very recently, the Andean Community on one hand which is with its other Andean nations, and that obviously has created all kinds of friction and strong words from one president to another. And Venezuela has pulled out from something which we did not follow very closely, the G-3, which was a trade pact that Venezuela had with Colombia and Mexico. Chavez's argument is that these are sort of neoliberal pacts, they are agreements with the United States, and we do not want any part of them.

What has happened, I think, for journalists who cover this is it has made it much harder for us to really put everything in neat little categories. This is left versus right, this is pro-Bush versus anti-Bush, this is regional. The thinking was that Latin America was close to the United States, and Mexico because of the proximity, but now everything has kind of gotten muddled. I do not think the waters have calmed yet so that we can say where these things are really headed, but it has gotten harder for us to really put things in neat little boxes.

Just a quick word on why this is happening, but I think a lot of this was touched on by Santiso, and other members of the panel will certainly look into this. There is, obviously, a very strong, polarizing confrontation between Venezuela and the United States that has kind of heightened tensions in the region. That is probably a factor that contributes to this kind of inter-Latin American squabbling, if you will. You have some of the economic issues that have already been discussed here. People have had great expectations from the reforms of the 1990s, they feel dashed that these expectations were dashed, and so people are wondering, `come on, why didn't I get a piece of this'. So you have people who are more confrontational doing well in the polls, not necessarily winning, but doing well.

And you have strains caused by the energy factor. You have the haves in energy -- Ecuador, Bolivia, the Venezuelans -- and the have-nots, the Chiles, the Brazils, although Brazil is getting better and improving its energy equation, but it still imports a lot, and so that causes some kind of strain.

Finally, just to round it up, I think what you are seeing now are these pragmatists, which is Santiso's term. Before they would not confront publicly with those that would be supporting the impossible, the neo-populists, but now you are seeing more and more of this sort of verbal confrontation between Latin Americans. Where all this leads, I do not know. I certainly hope to be writing about it. I will stop there. Thank you.

MR. COLLYNS: Thank you. Like the other speakers, I very much enjoyed reading Javier's book, and I enjoyed his presentation as well. In addition, I would say that the basic conclusion that in Latin America we are seeing policy making based on pragmatism is a conclusion that very much matches my own personal experience working here in the Fund. I have been Deputy Director in the Western Hemisphere Department for 5 years -- traveling around Latin America, going to conferences, meeting policy makers and discussing with them their plans. Indeed, they do take a very pragmatic approach. They are interested in what works, not involving some ideology either on the left or the right, with perhaps some limited exceptions. But the majority of policy makers in Latin America these days are pragmatic.

Charles Collyns

Going beyond that, it is not just that the policy makers are pragmatic, but the broader policy-making process rooted in the democratic regimes that are being established and consolidated over the past 15 years in Latin America very much supports that pragmatism. Echoing what Augustin was saying earlier, and also Javier, the major achievement of lowering inflation from multiple digits to single digits was a response to the popular will, not the populist will but the popular will that inflation should not be tolerated and that governments that allowed inflation to rise would be thrown out. So it goes beyond just a few clever policy makers or new policy-making frameworks, but to the will of the people to achieve low rates of inflation.

Similarly, on the fiscal side, I think there has been a major shift in the approach and an appreciation of the importance of fiscal discipline as the bedrock for macroeconomic stability. It really is no longer challenged in the way it was, and I think that the Brazilian example that Javier mentioned is a good illustration of this. Although there was market dislocation in 2002 when the change in government became imminent, the reality was that the Lula administration has proved just as committed to, in fact, even more committed to, fiscal discipline than their predecessors. The Lula government increased the primary surplus objective and has rigorously adhered to that higher objective, and it has really not been challenged within Brazil. There are many issues that are discussed and with great heat in the press, but not the fiscal framework.

You see a similar pattern in other countries. We have done some work looking at fiscal policies in the recent cycles and comparing it to previous cycles, and there is a dramatic change. In previous cycles, including in the 1990s, the period of expansion and easy access to capital markets, a typical response in Latin America was `these are good times, let's spend and borrow', but that has not occurred this time around. There is really continued, disciplined control of fiscal deficits, and in most cases significant primary surpluses and countries are bringing down the debt. All this is very good news.

However, as Javier mentioned, there is a long agenda of reforms, and I think we have all been disappointed at the very slow pace of recent progress with reforms. I think there are many explanations for why the pace of reform has been slow, but I would like to pick up with an explanation which I think is connected with Javier's book and the points he makes about the importance of pragmatism, which is the fact that the question mark on the quality of government in Latin America remains a major constraint on policy makers and on pragmatic policy making.

This is illustrated for me by a trip that I took to Latin America last summer with Agustín. We went to Guatemala, and Guatemala as some of you know has the lowest tax ratio in the continent at only 10 percent of GDP. There is a broad popular consensus that taxes need to be increased to provide resources, to increase spending on reducing poverty and meeting the Millennium Development Goals, and in fact, this was enshrined in the 1996 Peace Accord. So we went down there hoping to have a good discussion of how this might be achieved. But it was remarkable that no one that we met outside the government, and this included on one side bankers and the private sector and private-sector industry, but also on the other trade union leaders, civil-society leaders, NGOs, no one wanted to actually increase taxes because there is a tremendous distrust of the government's capacity to raise taxes in an equitable manner and to spend the additional resources in a way that would benefit their group. Everyone thought that they would be paying the taxes and someone else would be getting the benefits. So in Guatemala at this point, tax reform is not a live issue and I think this is a point that points very clearly to Javier's book.

So the problem is not just that policy makers have to be pragmatic, but the `realm of the possible' that they can achieve has to be expanded, and I think one of the key areas then is to improve people's confidence in the ability of governments to take action. Of course, there is great variety in quality of government in Latin America. I think the recent IDB study is a very interesting attempt to assess the quality of government across Latin American countries. And a number of countries including Chile, Mexico, Colombia, Brazil, are seen as having quite high quality, but many other countries have a much lower quality. There is a whole series of problems -- weak executive branches, party structure is dominated by personalities and interest groups, politically dominated judicial systems, frequent changes in leadership in key positions. For example, in Ecuador, a country I have been working on for the last 4 years, over those 4 years I have had to meet eight finance ministers, and many of those finance ministers have been extremely good, but if your average tenure in office is only 6 months, there is a major limitation on how much you can achieve during that period, and there have been frequent changes in policies and frequent reversals as a result.

Another good example is the experience with targeted income transfer programs. I think there has been an extremely good experience with the targeted income transfer programs. In Brazil, you are all familiar that the program will now be reaching 11 million families by the end of the year. Mexico and Chile have also been able to move forward. These programs are very successful. They provide immediate cash-flow relief for poor people, but also address the problems of human capital by tying the aid to improved education and improved health care. But such programs are very demanding of the quality of government. If you do not have a strong administrative capacity, then these programs are very easy to subvert and it is very easy for the funds to be siphoned off to go to the wrong families or to be used for political purposes. So a number of governments in Latin America which have been interested in these programs have not been able to move forward because they are nervous that introduction of such programs would in fact be a fiasco given a lack of capacity to implement them. So I think it is really important in Latin America to take steps to strengthen the quality of government and to broaden the realm of the possible for pragmatic policy makers.

Let me just quickly highlight four areas where I think the quality of government can and needs to be strengthened. One is to entrench a professional civil service. These countries all have had many civil service reforms, but too often there remain problems of patronage in appointments or frequent changes as I mentioned before. You need to introduce a system in which recruitment and promotion is strictly based on merit, where salaries are paid are at reasonable levels to reduce incentives for corruption.

Secondly, tax administration, as my example in Guatemala illustrated. I think effective tax administration is really key, and that goes beyond just having good people, but also having effective enforcement mechanisms and effective tax policy systems to eliminate loopholes. But only if you have an effective tax administration that people believe in and trust are you able to actually go ahead and start to increase revenues that you may need to fund necessary social expenditures.

Thirdly, transparency in government. Again, this is an area where some progress has been made, but a lot more needs to be done in many of these countries. I think transparency, moving off-budget items on budget, more frequent publication of accounts, more effective mechanisms to assess expenditure, is crucial. With such transparency, journalists and the public are able to actually see what the government is doing and where they see a problem, they can raise it and make sure that action is taken. In countries like Brazil, Mexico, and Chile, they also have problems, it is not that they are perfect, but they also have checks and balances, they have mechanisms such that when there is abuse, those abuses can be exposed and actions can be taken.

Finally, accountability. It is important to have effective mechanisms to make sure that ministers and officials are held accountable for their actions. This is a two-edged sword because you can actually go too far in the other direction. The accountability mechanisms need to be independent and not dominated politically. There is a risk seen in some countries that officials are too frequently prosecuted after they leave office. In fact, it becomes quite difficult to hire a senior official into important positions in countries because of the judicial risks that people are taking.

So these are four areas that I think are very important for improving the strength of government and these are areas where the Fund is in fact working in terms of providing technical assistance and assessments, and I think if we make progress in these areas, then it will help Javier's pragmatic policy makers to actually move forward in areas of reform. Thank you.

MR. NAIM: Thank you very much, and thanks for your very modest introduction [earlier].

(Laughter.)

Moises Naim

This was an interesting book, and it is as much a book about Latin America and about economics as it is a history. It is a history of ideas that shows a very interesting arc of how ideas are so quickly embraced, created and started, tested in Latin America. Latin America is a place prone to create experiments and test them and move on, and it is very interesting to see the evolution of that.

It is a very French book. It is encyclopedic. It is about everything. Javier touches on almost everything [about the region], its politics and its economics. I think there is a merit to that, there is a value to that, and it is very informative. It is a massive work of collection from other sources and personal reflections that I think it is very interesting to read.

Javier is a student, as he said, and a follower of Albert Hirschmann - who is also one of my intellectual heroes -- and he has drunk from that source. One of Hirschmann's traditional classical books is "Essays in Trespassing" where he was keen on suggesting the idea that if you trespass disciplines, you will enrich your analysis -- and Javier has done that.

Javier is also a follower of Isaiah Berlin, and his last chapter of his book is called the "Hedgehog and the Fox". The parable, the metaphor, is that the hedgehog knows one thing and does one thing and does it all the time, and the fox instead goes all over the place and chases after very different ideas and possibilities, scents and smells and goals. And obviously Javier is as a fox, he is not a hedgehog. I only lament that he probably overdosed both on Hirschmann and Isaiah Berlin and that is why the book has so much.

I left the book with two strong sensations, very personal sensations. One is: how recent is much of what Javier writes about? He concentrates much of the analysis in the 1980s and 1990s, and yet how remote it feels today. This echoes parts of what Pablo was saying and others were saying -- a lot of what he says is very recent yet it feels at least to me very remote, very past. The challenge is today. That is one of the problems of writing about Latin America, it is the most volatile region in the world and not for nothing. It changes every day and there are very strong assumptions and strong believes you have.

Today, for example, we are far more serene about the possibility that Latin America will turn to the left because of essentially 5 or 6 percentage points swing in the polls for Mr. Calderon and Alan Garcia. But a few weeks from now, we may end up with Ollanta Humala and Lopez Obrador in government and this meeting will have a different tone. So writing about Latin America is a challenge because it changes every time, and so one finishes the book and says it feels like there is something missing about what is going on today.

What I think is going on today -- I feel strongly, and I may be wrong -- but I feel Latin America is not only in a deep political crisis, it is in profound, profound intellectual bankruptcy. Latin America is experiencing and is going through a period of deep ideological bankruptcy, intellectual bankruptcy, in which its place in the world is not clear. Where does it stand between the high-tech competitors and the low-wage competitors, where is it vis-avis China and India? Where is it between democracy and authoritarianism; between centralization and decentralization; on market reforms? And so on.

A lot of the questions that are now presented and debated in the countries have very, very weak answers. We know what works on the more technical dimensions of policy making. We know about anchors, we know about inflation targeting -- that is something we know. It has its complexities, it has its difficulties, but -- I should not be saying this in the temple -- that is minutiae.

(Laughter.)

At the end of the day, you do get yourself a bunch of good economists, you get good friends from the IMF, and you are going to get it right. What is very, very difficult is to go beyond the platitudes of saying `Latin America needs stronger institutions,' `Corruption is a problem,' `Transparency is necessary,' `We need to be more competitive,' `Infrastructure investment is a priority'; `education'.

So we know all of these things. What we do not know is how to convert those valid diagnostics, that for having been repeated so often have become platitudes, into actual electoral platforms, actual ways of governing.

And Latin America is suffering today from not only this deep intellectual bankruptcy for which we lack very useful prescriptions of what to do, but from two corruptions. There is a very profound corruption of the war on corruption, and there is a very profound corruption on the war on inequality.

What I mean is that corruption has become the universal diagnosis in the region for the region's problems. Ask anywhere, open any newspaper, listen to any talk show, listen to any electoral debate, and you will see that the central theme, the central national conversations are corruption and inequality and exclusion. That has been hijacked and corrupted and is hampering I think politics, democracy and everything else. I can tell you more about that, but I do not have the time.

By the way, corruption is not mentioned in the book. If you look at the analytical index, the fox forgot to chase after corruption, which is not a minor thing in Latin America, but we can excuse that because the book has many other very interesting things.

The other thing that is very interesting is a paradox that I think has the key to some very interesting explanations for the region, and I will end here. It is what I have called elsewhere the paradox of Chavezismo and Chileanismo. Why is it that Chile -- a country that as Javier in his book so eloquently describes as a success story; a country that has lifted hundreds of thousands, perhaps even millions out of poverty; a country that is socially progressive and highly democratic; that has some of the best indicators in the world on almost everything -- is not a model in Latin America. That it does not get anybody excited in Latin America. What gets people excited in Latin America is Chavezismo. It is a model that we know that is manufacturing poverty and inequality. We know that it is dependent on very high oil prices. We know that it has a very powerful authoritarian component. And yet that is what gets people going in the region. Regardless if Ollanta or Lopez Obrador win, the fact of the matter is that there is a big chunk of the Latin American population that gets very enthusiastic about those ideas, ideas that are very bad ideas, ideas that have already been tested and have been proven to produce poverty, inequality, corruption, and lack of progress -- yet that is what gets people excited. If you solve the key for that, if you understand why is it that Chavezismo excites so much and Chileanismo does not move anybody, except the Chileans of course, we will start getting at least a conversation along the lines that I think is needed. Thank you very much.

Mr. ZETTELMEYER: Thank you so much, Moisés. Alvaro, any answers to that?

MR. VARGAS LLOSA: Thank you. By the way, Moisés, I just came back from Chile, and not even Chileans are that excited about Chileanismo.

(Laughter)

Alvaro Vargas Llosa

I am really honored to be here, and it is a great pleasure to be a part of this panel. I greatly enjoyed this book, Javier. I had not met you before, but it is a great honor. I must confess that I approached the book with some anxiety. I am an unabashed free-marketeer. I believe in free markets. I believe in free societies. I look at the world and realize that those countries that have adopted free markets are those that are doing best. And when I saw the subtitle to this book, I got very scared. I said the book that equates free markets with populism and blames both for the debacle of Latin America in the last few decades is something that needs to be challenged.

However, in reading the book, I think I can live with most of it. It is very thought-provoking, it is very well argued, it is very intelligently constructed. And I also think that by some definitions of pragmatism, it is perfectly defendable by somebody like me who believes passionately in free markets.

Let me give you a couple of quick definitions of pragmatism that I think are applicable to Javier's general argument. One I got from an American philosopher who about a century ago posed a very interesting dilemma. He said he wanted to define pragmatism, and then he thought of this example. He said, imagine a squirrel, an ardilla, going around a tree, and there is a man on the opposite side of the tree trying to catch a glimpse of this squirrel. Every time the man moves around the tree, the squirrel moves around quicker than the man, and, therefore, there is always a tree trunk between the man and the squirrel. He says, is the man actually moving around the squirrel? And he says, by some definitions, yes, by some definitions, no. It depends what the practical meaning of the words going around the tree is.

If by going around the squirrel you mean that at some point the man is to the north of the squirrel, and then to the east of the squirrel, and then to the south of the squirrel, and then to the west of the squirrel, then, yes. But if you mean by going around the squirrel that at some point the man is in front of the squirrel, and then to the left of the squirrel, and then to the back of the squirrel, then, no, the man at no point is in those positions. So the answer to the question is, it depends on the practical meaning of the word going around.

I would use this definition to look at the word liberalismo which Javier criticizes in the book and at some stages equates with populism, especially when he talks about the 1990s and says that the market replaced the state as a paradigm and both utopias, the utopia of the state and the utopia of liberalismo, of the market, failed miserably and now we are in the era of pragmatism. By some definitions, according to the William James definition, liberalismo means exactly what Javier means by pragmatism, and, therefore, does not mean by what he means by populism and utopia.

The other definition is more of a standard definition which is the idea that beliefs do not represent reality, they are simply dispositions which prove to be either true or false according to how much they help the believer accomplish his goals. By that definition, my brand of liberalismo, of free markets, I think is also compatible with Javier's definition of pragmatism, because it is a disposition which I think when it is tested against reality proves to be a much better way of achieving the goal of development and prosperity than all the other alternatives.

In the light of this, I would look at the 1990s, and let me be very quick about this because, yes, that is a very remote time for Latin America, in very different eyes. I would say what failed in the 1990s was not liberalism, was not free markets, what failed is the fact that liberalism and free markets were tainted, were marred by populism, by utopia. What was lacking was an institutional underpinning -- a reform of the judiciary for instance -- an institutional framework that would protect the individual against the encroachment by the power of those who were powerful enough to bend the rules. So if you look at every single reform in the 1990s in every single country, you will find so many examples of undue government intervention that you could hardly say that was an utopian free-market era.

If you look at public spending in Argentina, it went up in the 1990s by 100 percent, and GDP went up by 40 percent. So public spending was 2-1/2 times the growth of the economy. If you look at Brazil, it went up by 33 percent. If you look at banking laws in Mexico, there is an incredible amount of cronyism, of government intervention to protect and privilege certain sectors of society against the rest, and, therefore, not create the sort of competitive environment that would have made out for a much healthier type of banking system. The result of that was what? The result of that was the collapse of the financial system, $70 billion of taxpayers' money had to be extracted from Mexican society to pay for that irresponsibility which I think originated in the fact that you had a very privileged-driven system that was not competitive and was not underpinned by an institutional framework that protected the very important principle of equality under the law. If you look at many other examples, I do not want to go into too much detail, and I have a whole book trying to explain this, you will see that exactly this thing happened in every sort of reform.

So what you had is, yes, a move toward liberalization, a move toward privatization, a move toward decentralization, but you lacked the institutional underpinning that protects a society against privilege, against too much power politics. So what you had was not competitive markets, but monopolies, monopolies that were in a position to exploit a large section of the population.

So under those conditions, it is no surprise that investment levels were not very high. You had about 18, 19, to 20 percent of GDP investment levels. They are not bad, but they are not as good as Asia with 25 to 30 percent, or even Chile with 25 percent. These were somewhat low investment levels. You had a situation in which the economy was not very productive.

In my own home country you have a very interesting situation, about 3 million small- and mid-sized companies. Three million. And these are mostly managed and owned by very poor or somewhat poor people who have not obtained degrees or anything, do not have much of an education, but who have an instinct for entrepreneurship. Yet these people are not able to produce very much. They produce about 30 percent of the total GDP of the country, and only about 2 percent of the companies of Peru produce almost 70 percent of the GDP of the country. So you have a situation in which this institutional arrangement prevents poor people, and especially small- and mid-sized companies, from producing very much. So they are at this subsistence level. They get on in life, but it is not a pace that we can compare with what is happening in other areas of the world, what is happening in Estonia, what is happening in the Czech Republic, what is happening, of course, in Ireland, what used to be happening in New Zealand -- now they have slowed down a little bit. Or certainly what is happening in China where 250 million people were pulled out of poverty in the last 20 years, or with what is happening in India where about 300 million people comprise the middle class nowadays. So you have a pace that is slow and that is, of course, creating a lot of frustration at the base.

This takes me to the current situation where we have a very paradoxical scenario. On the one hand, the macroeconomic figures are looking very healthy, they are looking very good. From 2003 to 2006 you had about 4 to 4.5 percent average growth per year. The ratio of debt to GDP has gone down to about 53 to 54 percent. Not bad by Latin American standards. Where you have even this year a current account surplus of about 1.3 percent mostly, I think, due to remittances to this country by immigrants, but, still, pretty healthy figures. And yet you have these electorates that are voting either massively or to some extent for very radical, antiestablishment figures. So clearly there is a disconnect there between this rosy picture that the macroeconomic statistics speak to us about, and the sentiment at the base. And I think that disconnect to a large extent has to do with the frustration with the 1990s, that some attribute to neoliberalism and some, like me, perhaps a minority, attribute to the fact that neoliberalism was tainted with utopia and populism and undue government interference.

I would hope that we move toward reform because if we continue along this path, sooner or later the international conditions will vary and will change, as they have so often done in the past, then many of our governments will be seen to be a lot less pragmatic than we think. If you look at Argentina, they seem to be doing everything wrong, and yet they seem to be getting everything right. If you look at the statistics in Argentina, they look wonderful. Every single statistic you look at looks absolutely wonderful, and yet just look in detail at what they are doing. Prices all over the place, the president going from supermarket to supermarket telling the supermarket attendants what prices to charge for what items. They have banned the exports of meat in Argentina. This is lunacy, Argentina, the meat exporting par excellence, and they are banning that. Why? Because they want to create a superabundance in the internal market so they can bring prices down. They have a big energy crisis in Argentina. Why? Because 4 years ago they controlled prices, and, of course, investors did not invest, and when investors do not invest, what happens? Supply goes down, and at a time when, as was the case in Argentina, demand was doing up because the economy was picking up. A lot of people were converting their automobiles from oil to gas, so demand went up, supply went down because there was no investment. So what happened? An energy shortage. And this had international repercussions because [it affected] Argentina's [commitment] to export some of that gas to Chile, and, of course, as you well know probably better than I do, Chile was quite displeased about this. So that is one very interesting case in which everything looks good from the outside. The picture is pretty rosy. And yet I think there is a fundamental weakness at the base that will become more apparent as the international conditions vary.

If you look at some other countries, and I will finish with this, the situation is I think a bit better, a bit stronger. If you look at Brazil -- I just came back from Brazil recently -- I think they are on a much better footing. I think they are doing things in a better way. But Brazil is not reforming enough. It has a very heavy state, about 10 million public employees in Brazil. It has a pension system that has not been privatized, unlike most of other Latin American countries' pension systems, and that creates a big financial commitment on the part of the state, almost $20 billion. And it has a very complex political structure that makes decision making very hard, and part of the corruption scandals over the last 2 years have to do with this very complicated institutional political framework.

So, yes, managing the legacy in a responsible way, which is what President Lula has done, is a wonderful thing and is a very, very positive development for Latin America because many people looked up to President Lula. But unless he reforms this legacy, unless he reforms this state and this institutional framework that he operates under, when international conditions vary, I think, again, many of the weaknesses at the heart of the system will be apparent.

And if you look at Mexico, another country that is very interesting, they are not doing that bad, but it is a country that has lost a number of companies, almost 300 companies, to China in the last few years. And China, I remind you, is a country that is governed by a Communist Party and Mexico is right next door to the United States, so if I were a Mexican, I would be a little ashamed to lose 100 important companies to China. I would not want that. Mexico has still a large chunk of its economy, oil and electricity, in the hands of the very, very inefficient government. Rather than have a healthy debate about whether that should still continue to be the case, what you have is almost a national consensus that national dignity dictates that that should continue to be the case. And while that continues to be the case, China is busy luring away from Mexico many of these companies and investors that find these Mexican costs too high.

So, yes, by all means let us be pragmatic, and I absolutely commend you for this argument which I think is very good. But I hope that pragmatism is not incompatible with bold reform, especially institutional reform, because if it is, I think that there are enough weaknesses in the current situation that would create a bad turn of events once the international conditions vary. Thank you very much for this wonderful book, Javier.

Mr. ZETTELMEYER: Thank you so much, Alvaro. Theoretically, we are out of time, but I am going to be pragmatic.

(Laughter.)

And also, this is a book forum about Latin America, and we started late and we will end a bit late, so I am going to just allow a few questions, maybe three questions in summary, and then I will give Javier the last word and we will wrap up. So just a couple of questions if there are any.

QUESTION: Thinking about Javier's arguments and applying them to my own country, Brazil, I tend to think that pragmatism is just a form of tamed populism, basically a populism that has its hands tied down either by debt, by these countries' heavy debts, or by some institutional improvements that have happened in the 1990s like privatization, like better governance, et cetera. So President Lula, for example, perhaps would be much more populist if he had the means to be so, but he is firmly handcuffed, while President Kirchner is sort of more loosely tied down.

So if they were restricted either by debts or by institutional improvements, I think that debt is less of a problem now than it was a few years ago. Many countries are repaying the IMF or repaying the Paris Club, et cetera. So it leaves us with the institutional improvements, and they are being challenged in many countries. As Moises said, a few weeks ago we were counting on Ollanta Humala in Peru and Lopez Obrador in Mexico, and now the situations might have changed a little, but at least you see a number of people in these countries wanting to vote for these classic populistic alternatives.

So my question is how long do you think the institutional improvements will hold? Have they have been like levees that hold up the populist waters, but which, as recent history shows, can collapse when poor maintenance meets a big challenge. So what do you think about the future? Could populism be the next "ism" in the region?

MODERATOR: One more question?

QUESTION: I am wondering if you see any particular countries as important in the move to pragmatism, if other countries are looking to a particular country, Brazil in particular, as a role model, or if this move is fairly independent to each country and they are learning from their own lessons rather than from lessons of their neighbors.

MODERATOR: Thank you. Javier, maybe 2 minutes.

MR. SANTISO: Obviously an impossible [task], but [let me try].

First of all, I would like all the commentators for the very kind words.

Pablo, I totally agree with your point that Latin America is not united behind Chavez, and we are seeing that. It is obviously good news in a way. But maybe we could be very provocative and say that there is a `Chavez effect' that may be a blessing in disguise for all other Latin American countries. Without Chavez or Evo Morales, without those good revolutionaries who are not only making a lot of noise but moving a lot around the region, Latin America would get less attention from Washington, from Paris, from Madrid. Because, as Moises said we are not very excited by Chileanismo, and not in our capitals either. Chileanismo does not make the headlines in the newspapers, not at least on the continent where I come from.

Part of the book was also to stress that point, that is, to break the stereotypes that we have when we look at the region. There was a compatriot of Moisés, Carlos Rangel, who wrote a wonderful essay in the 1970s. One of the criticisms he was trying to put on the table is to say, `look, guys from the U.S. and from Europe, first you thought of us like bon savage, which is the world's stereotype, and now you are thinking of us like the bon revolutionaire, the good revolutionary'. But, said Rangel, `we Latin Americans, we love to play the good revolutionary when you ask us to play the good revolutionary, et cetera'. Part of this dance is over, and this is Chileanismo if we can call it that way. Maybe Chileans stopped to dance and to play these stereotypes that were getting converted into realities.

Charles made some interesting comments. I like them very much. Obviously, the quality of government is a problem. You mentioned the question of tax receipts. Obviously, you have to increase the tax receipts and this is an issue. But look at the two extremes in the region, Mexico and Brazil. Brazil has huge tax receipts with 35 percent of GDP. Mexico has 15 percent of GDP, a very low base. When you compare the quality of the public goods -- education, et cetera, -- it is not very high in both cases. So it is obviously not only a matter of raising fiscal receipts, it is also the efficiency of spending, what you do with the receipts.

Moises, I think always very much about your comments. On the intellectual bankruptcy, yes, probably it is the case in Latin America, but I have the sense that this is not only the case for Latin American countries. Simply I will talk about the country where I come from, I have a strange sense of intellectual bankruptcy, and I will not develop here on that.

Alvaro, I liked very much your comments and I thank you. Above all, I like that you read the book and you saw that I am not mixing neoliberalism with populism -- obviously that was not my purpose. I am a great reader of Richard Rorty, who is the definition of liberal pragmatism. But let me also comment on you insistence on [the importance of] microeconomics. We tend to be very obsessed with macroeconomics, when in fact the example that you gave on Peru was very interesting because in the book I have a chapter on structural adjustments as temporal adjustments, and we can measure them. In fact, thanks to the work of Hernando de Soto, we know the time that you need to open a business, and we are seeing how the countries are trying to reduce the transaction costs. So we see the temporal adjustment to the way that the world's economy is working, and probably there is more room for maneuver there in these microeconomic fields for Latin American countries.

Take the example of Mexico and the issue of its competition with China. Obviously, you will be able to solve some of the competitiveness issues of Mexico if you tackle some microeconomic reforms. Maybe you can also focus on improving your infrastructure. Mexico has a big asset which is the proximity to the U.S. If you improve the quality of your airports and ports and transaction costs there, you will maintain your comparative advantage regarding China, which is not the case today. The ports in Mexico are not very efficient, and they are losing their competitive advantage. For this there is no need for spectacular reform to be passed in a parliament that will be fragmented into three parts anyway. So probably we should devote much more attention on microeconomics, which is to come back again to some kind of `possibilism' approach, and not a grand design approach. Thank you.

There were the questions. I did not answer the questions.

MODERATOR: I will give you give you 15 seconds to say something nice to these gentlemen.

MR. SANTISO: There were the questions on how long these institutional improvements could endure, and there was the question about Brazil.

I do not know how long they could endure. Again, I come back to my conclusion that we need urgently to think more about the social pacts and the fiscal pacts. What do I mean by fiscal pacts? Maybe this is unusual and not maybe the best place to say it. When you talk about violence in Latin America, you talk about military violence or other kinds of violence, but there is also a fiscal violence in the way that some societies organize the extraction of fiscal rents. You have fiscal extractions organized by the elite, and this is worrisome because if you do not have fiscal legitimacy, it is quite complicated to have the legitimacy for democracy.

MODERATOR: Thank you very much. Thanks to the audience for staying on so long, and thank you to all the panelists.

About 80 people turned up at a May 23 IMF Book Forum at IMF Headquarters in Washington, D.C., to listen to dispatches from the front lines in the "battle for Latin America's soul" (as the cover of a recent issue of The Economist has it). The OECD's Javier Santiso, author of Latin America's Political Economy of the Possible, put forward the controversial hypothesis that the real story coming out of Latin America is the move to the "politics of pragmatism."

Audience

In his opening remarks, IMF Deputy Managing Director Agustín Carstens called this "a fortunate phrase"-one that captures particularly well what has happened in the arena of monetary policies. He said that the low inflation in Latin America today compared with around 1990 is an "expression of a political consensus" that high inflation is not good for society, least of all the poor. The granting of independence to a number of central banks in the region was a reflection of that political consensus.

Pragmatism is taking hold . . .

Carstens hoped that people in Latin America would similarly say they were "sick and tired" of banking crises and grant greater independence to supervisory and regulatory agencies, thus enabling better financial sector policies. Periodic banking crises had set back growth in the region. Carstens called the move to pragmatism "an unfinished revolution." It still had to take hold outside the sphere of monetary policies.

Santiso described the onset and spread of pragmatism in Brazil, Chile, and Mexico. By maintaining policy continuity through political transitions, these countries have offered other Latin American countries a model to follow. He predicted that the election in Brazil this year would result in a further "decoupling" of economic policies from political transitions. Bolivia, Santiso acknowledged, offers the other end of the spectrum in the "menu of options" available to Latin America. The nationalization of that country's energy sector, the Miami Herald's Pablo Bachelet said, had introduced a schism within the left in Latin America and made it difficult to put players into "neat little boxes" such as "left versus right or pro-U.S. versus anti-U.S." If anything, the box these days in Latin America seemed to be that of the "energy-haves versus the energy have-nots."

IMF Western Hemisphere Department Deputy Director Charles Collyns said that Santiso's assertion about the spread of pragmatism "matches my own personal experience" from travel in the region and meetings with policymakers over the past five years. He also cited as examples of pragmatism Brazilian President Luiz Inacio Lula da Silva's maintenance of the fiscal framework he inherited from his predecessor and policymakers' abstention thus far from the "spend and borrow" tendencies of the past, despite the present good times. Picking up on Carstens's theme, Collyns said that the realm of pragmatism "has to be expanded" into the fiscal and structural arenas. He cited Guatemala, where increased trust in the government's ability to use taxes in the general interest is needed, so that the country's low ratio of tax revenue to GDP can be raised, thereby providing much-needed public spending.

. . . or isn't it?

The other two speakers expressed greater skepticism about Santiso's assertion of the spread of pragmatism. The Independent Institute's Alvaro Vargas Llosa worried that when the beneficial global waters recede, the move to pragmatism will be exposed as rather shallow because the region did not really undertake fundamental institutional reform during the 1990s shift to neoliberalism. Foreign Policy's Moisés Naim agreed. He lamented the region's "profound intellectual bankruptcy" and said that the agenda for institutional reform had been turned into "platitudes" rather than into successful electoral platforms. Provocative as always, Naim asked why, if "Chileanismo" is such a grand success in its outcomes, so many people in Latin America continue to be drawn to "Chavezismo."